Good day, ladies and gentlemen. Welcome to the Q2 2009 Intel Corporation earnings conference call. (Operator Instructions) I would now like to turn the presentation over to your host for today’s call, Mr. Kevin Sellers, Vice President of Investor Relations. Please proceed, sir.

As we begin our call, let me remind everyone that today’s discussion contains forward-looking statements based on the environment as we currently see it and as such does include risks and uncertainties. Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially.

Following brief prepared remarks from both Paul and Stacy, we will then take questions.

We will also post on the investor website the appropriate GAAP financial reconciliations for any non-GAAP financial measures mentioned during the call.

So with that, now let me hand it over to Paul.

Paul S. Otellini

Thanks, Kevin. Our second quarter results were clearly better than we expected, with demand strengthening throughout the quarter. While the global economic environment is still recovering, our customers signaled increased confidence for a seasonal second half with their ordering patterns. I believe that this reflects how critical personal and enterprise computing have become to the world.

From a consumption perspective, consumer purchases led the way with a strong rebound in mobile processor shipments. Enterprise PC volumes remain weak but server processor volumes were better than expected, driven by a strong ramp of our Nehalem based products.

We are seeing significant interest in our new products from Nehalem based Xeon processors to Atom, to core i7 on the desktop. These are the fruits of our tick-tock strategy at work.

Globally we saw strength in Asia-Pacific, particularly China, where their stimulus programs continue to generate meaningful growth in their PC market. The U.S. also had a strong quarter, while Europe’s recovery lagged that of the U.S. and China.

Let me say a few words about some of our new products.

We launched our Nehalem EP server processors at the end of Q1 and in just one quarter from launch, Nehalem already makes up over one-third of all of our dual socket server shipments. We expect the ramp to continue with Nehalem shipments crossing over the 50% market in August.

We remain on track to launch our Nehalem EX processor line, which is the multi-processor version of Nehalem, in the second half of the year. Nehalem EX is expected to redefine the performance standard in that segment.

Atom revenue grew a very strong 65% this quarter, reflecting a bit of a snap-back after the inventory correction we saw in late Q4 and in Q1. While netbooks are the main catalysts of the overall growth in Atom, we are pleased to see Atom now making its way into net-tops and embedded applications.

We continue to add new customers in the embedded market segment and are pleased with the great progress Atom is making in opening up new opportunities for Intel, all with healthy product margin profiles for the company.

Next, our recently introduced consumer ultra-low voltage mobile processors are helping to create a new PC segment of ultra-thin, full function notebooks. This product line takes advantage of two key technologies. First, our high K metal gate transistors, which allow us to create the extremely low voltage variance of our processors, and secondly we have created advanced packaging breakthroughs that significantly reduce the overall footprint and thickness of notebooks based upon these products.

Ultra-thin notebooks are now shipping in the market and we believe they will further invigorate the notebook category and be a significant contributor to our profits in the future.

Finally, I want to comment on some of the strategic announcements made recently that are aimed at accelerating our growth initiatives. The first is the acquisition of Wind River, which is nearing completion. This transaction is an important step for us and we expect it will contribute -- it will combine our world-class silicon capability with their world-class software and services to create a new class of differentiated products for the embedded and handheld market segments.

Our Nokia announcement was also an important milestone as we move towards building products that will allow us to compete effectively in the handheld market segment. Our collaboration with Nokia is deep and multi-faceted. The announcement specifically referred to our open source software collaboration and the acquisition of a 3G license. Other work is underway and will be announced in the future.

In closing, I want to thank the employees of the company for their outstanding execution and attention to detail in a very difficult economic environment. Our efficiency progress and cost structures continue to be important advantages for us and our financial performance clearly reflects that.

We are now operating with more speed and agility than perhaps at any time in the company’s history. As we continue to grow our core business and ramp our new initiatives, this agility will be increasingly important to us and to our success.

With that, let me turn the call over to Stacey.

Stacy J. Smith

Thanks, Paul. Second quarter sales were better than expected. In anticipation of a seasonally up second half, the supply chain began refilling inventory positions that had been depleted over the past two quarters. As a result, we experienced better-than-expected demand for microprocessors and chipsets, which contributed to $8 billion in revenue, a 12% sequential increase, the largest first quarter to second quarter growth in over 20 years.

The company’s execution was strong and contributed to our improving financial results. The factories executed particularly well, with inventories down an additional $240 million this quarter, improvements in throughput time and yields and unit costs better tan expected across all lines of business.

Additionally, spending was in tight control and the number of employees was down an additional 2%. The strong execution can most clearly be seen in the 5.5 point improvement in gross margin quarter to quarter.

Despite the strengthening market and the company’s strong execution, the impact of the European Commission’s $1.45 billion fine resulted in an operating loss of $12 million, and a quarterly net loss of $398 million.

Excluding the impact of the fine, operating profit was $1.4 billion, up 122% from the first quarter and net income was $1 billion, up 67% from the first quarter.

On a year-over-year basis, revenue for the second quarter was down 15%, an improvement from the 26% year-over-year decline in the first quarter. Revenue in microprocessors, including Atom, was better than seasonal patterns on higher volume and lower average selling prices. Second quarter revenue for Atom-based micorprocessors and associated chipsets was $362 million, up 65% from the first quarter. Excluding Atom-based microprocessors, overall microprocessor average selling prices were slightly lower than the first quarter.

Gross margin dollars were $4.1 billion, $800 million higher than the first quarter. Gross margin percentage at 51% was 5.5 points higher than the first quarter and the outlook that we provided in April. The largest drivers of the sequential change included a 3.5 point increase from higher CPU sales volumes, a 3.5 point increase from lower period costs, which consisted of several points from lower excess capacity charges, offset some by higher start-up costs. The increases were also partially offset a couple of points by lower CPU average selling prices.

Spending for R&D and MG&A was approximately $2.6 billion, slightly higher than the first quarter due to higher marketing spending. In addition, we had restructuring and asset impairment charges of $91 million and the EC fine of $1.45 billion.

For the second quarter, the number of employees is down by 2,000 from the first quarter to 80,500, primarily due to previously announced factory actions.

Gains and losses on equity investments and interest and other income was a net loss of $38 million, smaller than our outlook of a net loss of $150 million, based on lower impairments and positive fair value adjustments on mark-to-market trading assets, as the market for certain debt instruments strengthened during the second quarter.

Excluding the impact of the EC fine that was not tax deductible, the provision for taxes in the second quarter was at a 25% tax rate, slightly higher than the 24% previously forecasted.

The company’s strong execution can be seen in the strength of our balance sheet. Total inventories were down an additional $240 million after the $700 million reduction in the first quarter. Total cash investments, comprised of cash, short-term investments, and debt security trading assets ended the quarter at $11.3 billion, $1 billion higher than the first quarter.

Cash flow from operations was more than $3 billion. Capital spending was $981 million. We did not repurchase stock in the quarter and paid nearly $800 million in dividends.

As we turn now to the outlook for the third quarter, please keep in mind that Intel's business outlook includes the Wind River transaction, which is expected to have revenue of less than $40 million and reduce EPS by about $0.01 in the third quarter. The outlook does not include the potential impact of any other mergers, acquisitions, divestitures, or business combinations that may be completed after July 13th. I will use the midpoint of the forecast ranges when making comparisons to specific periods.

We are planning for revenue to be about $8.5 billion, plus or minus $400 million. The midpoint of this range would be an increase of 6% from the second quarter, which is in the bottom half of the historical seasonal range based on the expectation of continued weakness in the enterprise market segment.

Our expectation for gross margin percentage in the third quarter is that it will be 53% plus or minus a couple of points.

Anticipated improvements in the CPU business are expected to contribute three points sequentially to gross margin through higher sales volume and lower unit costs. An additional three point increase is expected from reductions in excess capacity charges and start-up costs.

These increases are partially offset three points by inventory write-offs, primarily for the lead 32-nanometer products built prior to qualification for sale and one point for lower CPU average selling prices.

Spending for R&D and MG&A in the third quarter should be approximately $2.8 billion, $200 million higher than the second quarter. The majority of the increase is a classification of spending as process engineers move from cost of sales to R&D.

Additionally, in the separate category for restructuring and asset impairment charges, we expect expenses of approximately $40 million. Amortization of acquisition related intangibles primarily associated with the Wind River acquisition is also expected to be approximately $40 million.

Depreciation is forecasted to be approximately $1.2 billion.

Our estimate for gains and losses from equity investments and interest and other income is a net loss of approximately $80 million. The loss is higher than the second quarter because we had mark-to-market good news in our trading assets in the second quarter that we do not expect in the third quarter.

Our forecast for full-year spending on R&D and MG&A is between $10.6 billion and $10.8 billion, $200 million higher than our prior forecast due to the addition of Wind River and higher revenue and profit dependent spending.

Our expectation for annual capital spending for 2009 is that it will be $4.7 billion, plus or minus $200 million, lower than the previous forecast and slightly down from $5.2 billion in 2008. The reduction in forecasted capital spending is primarily due to the increased roll-forward in capital from 45- to 32-nanometer and improved factory efficiencies.

The tax rate for the third and fourth quarters is now expected to be 23%, one point lower than the prior forecasts.

As we end the difficult first half of 2009, it is worthwhile to reflect on the financial progress we made in the past quarter. We achieved a $1 billion increase in revenue in a quarter that is typically down. Gross margin was 5.5 points better. Spending and the number of employees were in tight control and we continue to generate efficiencies across our operations.

We generated over $2 billion in cash from operations in excess of what was required to pay our dividends. Capital efficiency allowed us to reduce our CapEx forecast $500 million from last year.

Over the past two quarters, inventory has decreased by over $900 million, and we will continue to extend our technology leadership as we ramp our 32-nanometer factories.

As we look into the second half, we remain committed to maintaining the strong execution levels that have benefited us over the past six months. I am confident that the combination of a strengthening market and strong execution set the foundation for continued improvement in our financial results.

With that, let me turn it back to Kevin.

R. Kevin Sellers

Okay, thanks, Stacy and Paul. We’ll now be happy to take questions. In order to facilitate as many questioners as possible, each participant will be limited to one question and a follow-up. The Operator will prompt your question and then I’ll ask if you have a follow-up.

So with that, Christina, please introduce our first questioner.

Question-and-Answer Session

Operator

Your first question comes from the line of Mark Lipacis of Morgan Stanley.

Mark Lipacis - Morgan Stanley

Thanks for taking my question. I guess the first question would be could you provide color on channel inventories? Do you think there is restocking that went on in the channel and how do you feel about the inventories in the channel? Are they over-inventoried, under-inventoried still or about right?

Paul S. Otellini

I’ll take the first part. By channel, I think you probably mean the broad channel but let me comment on the three levels of inventory that we see. First of all, our inventory, which as Stacy said for the first half is down $900 million, so our own inventory is in very good shape. The distributor inventory that we take reserves for is also in very good shape. It was about flat quarter on quarter and that’s in a growing quarter so if anything, that could use a little bit more heft as we go into the second half. Thirdly, there’s the inventory of our products that has to sit at the OEMs and their reseller channels. Everything we’ve seen suggests that’s in pretty good shape. Our major OEMs are all on a hub [inaudible] system from us, so there’s really no likelihood of large inventory amounts in their work in process, and everything we’ve seen with our reseller channel checks suggests that’s also in very good shape.

I think you have to -- when you look at inventory this quarter and the overall growth in the quarter, I think there’s three things going on here. First of all is that overall consumption is recovering and we’ve seen some growth in overall consumption, particularly in notebooks, consumer notebooks, as we spoke about. Second is that the inventory channel, which had dramatically depleted itself in the fourth quarter and into the first part of the first quarter, is starting to refill part of its -- to where its normal levels have been. And the third is the general view of our customers to build some inventory up in anticipation of a stronger seasonal second half. The combination of those three really is what made the quarter happen the way it did and also it give us confidence in the second half and fairly good confidence on the levels of inventory that are out there.

And the second part of your question?

Mark Lipacis - Morgan Stanley

I think that actually covered both parts of that question.

Paul S. Otellini

Okay, Mark. Thanks.

R. Kevin Sellers

Do you have a follow-up, Mark?

Mark Lipacis - Morgan Stanley

Yes, please. As you look into Q3, could you give us a sense of how you are thinking about how your guidance is impacted by back-to-school spending or any kind of a corporate refresh? Thank you.

Paul S. Otellini

Well, there’s certainly some -- given the consumer notebooks and consumer sales have been the -- kind of the strongest element of this recessionary period, we’re expecting some of that to continue in some back-to-school but we are not out there thinking that there’s a recovery to prior levels in the aggregate.

In terms of enterprise, I actually -- we are not planning for a big refresh this year. I think that there’s likely to be a refresh coming, when you look at the ageing of products that are out there, desktops in the corporate environment are about four years old, notebooks three-and-a-half years old, servers about three years old. At some point, those need to be refreshed. I think there is an opportunity for that to happen around Win 7 and our new technologies, which work pretty well together in terms of new stability and security features.

But we’re not counting on that happening in large measures in 2009.

Mark Lipacis - Morgan Stanley

Thank you very much.

Operator

Your next question comes from the line of Sumit Dhanda with Banc of America Merrill Lynch.

Sumit Dhanda - Banc of America Merrill Lynch

Stacy, first question for you -- you talked about the write-offs as it relates to your 32-nanometer RAM costing you three points in gross margins in Q3. How should we think about Q4, just specifically as it relates to that element of your gross margin guidance? Should we just think about adding that back and then of course flowing it as we would normally, based on our assumptions of volumes or unit costs?

Stacy J. Smith

Yeah, good question. Let me back up and explain what that is -- it’s a pretty normal phenomenon that we see, or actually it’s a very normal phenomenon that we see. As we ramp the new process technology, up until the point that we qualify a product for sale, if we in the quarter we’ll write-off the inventory that we built on that product. That’s the lion’s share of the three points of reserve impact that you see in the third quarter forecast. And yes, you’ll see two to three points of that coming back in the fourth quarter because we won’t repeat that write-off, so that gives us a little bit of tailwind as we go into the fourth quarter.

Sumit Dhanda - Banc of America Merrill Lynch

Okay, and then the second question again relates to inventories -- you know, down $240 million after the $700 million decline in Q1, I mean, one could almost argue that there [a little too low] days of inventory down in the 60s now, which is the lowest level we’ve seen in some time. Are you comfortable -- I mean, let’s assume that there is some upside to demand in the second half of the year, do you feel like both your throughput times as well as your current inventory profile will be adequate to serve the demand outlook?

Stacy J. Smith

Yes. There’s actually I think two elements to your question. The first is yes, inventory levels are actually a little lower than I’d like. As Paul said, that’s true when we look at our channel customers, it’s true when I look internally. What happened was we saw a Q2 that strengthened through June and that caught us a little bit by surprise and so where I thought I was going to build a little inventory in Q2, we actually depleted inventory.

That said, you know, I still have un-utilized capacity in the third quarter, even with my up-tick in margin, I expect to have un-utilized capacity in the fourth quarter. So we’re confident that we can respond to supply and in fact, I think I’ll keep a little more 45-nanometer capacity in place, you know, just as a precaution if this market ends up being a little stronger than we thought.

Sumit Dhanda - Banc of America Merrill Lynch

Thank you.

Operator

Your next question comes from the line of Glen Yeung with Citigroup.

Glen Yeung - Citigroup

Paul, you know, when I look back at the history of your gross margins, from the bottom gross margin is typically in the mid-40s. It’s usually four to six quarters when you can get back to a quarter gross margin of 58% or higher. And obviously I recognize who the hell knows what’s going to happen four to six quarters from now but do you think that a 58%-plus gross margin quarter is something that’s achievable for the company on at least a one quarter basis, looking out some time in the future?

Stacy J. Smith

Yeah, Glen, let me take that and then Paul can add color commentary if he wants. I think there’s two things to keep in mind -- one is the supply chain in general in this recession responded more quickly than it has in the past, and that’s true for the worldwide supply chain you saw the amount of inventory that came out quickly over Q4 and Q1, as well as our inventory levels came down pretty dramatically in Q4 and again in Q2, so I think that has kept the duration where we are down below what I’ve called the normal range of 50% to 60%, a little lower than we’ve seen in prior downturns which I think is a positive sign. That responsiveness of supply chain I think is healthy.

In terms of can we be back in the upper end of that range, you know, what I said at the investor meeting is yes, I expect our gross margin profile over the next several years to not be different than what we have seen over the past several years and the majority of our gross margin readings over the last 10 years have been between 50% and 60%. I think that we can be at the upper end of that and I think there will be times where we have excess capacity charges or other things that we’ll be at the lower end of that. It really just depends on kind of the business conditions inside that quarter but there’s no fundamental reason that we can’t be at the high-end of that gross margin range.

R. Kevin Sellers

Glen, you had a follow-up?

Glen Yeung - Citigroup

Yeah, the follow-up is actually thinking about ASPs also. So I looked at a chart of ASPs over time and what you tend to see cyclically is when we go into a down cycle, ASPs come down, I assume that’s because mix starts to move lower. But by the same token, as you go into an up cycle, ASPs actually start to improve ostensibly for the opposite reason. I wonder if you think that’s something that can occur and maybe give us your response in the context of mix with Atom and the context of a mix without Atom, just so we can get a sense as to how much Atom’s impacting that.

Paul S. Otellini

Well, I think your analysis of prior cycles is right but I’m not sure that it will play out that way this cycle. The industry is a lot bigger and it really is segmenting much more discreetly than it ever has before in terms of the differences between servers and mobile and desktop and now netbooks, you know, all interacting with each other.

In general, the reason we’ve done well in up cycles isn’t just demand driven but the fact that Intel has invested traditionally in new products through those and the new products are premium products and they tend to pull us out of things, or as recessions end and cycles end we tend to be able to sell those more aggressively and that’s helped us -- that part of the equation is not going to be any different. We are investing heavily in new products and they are gaining traction, as I talked about before.

What I think is different this time is the nature of the cycle and the -- just the sheer size of the PC industry. I mean, netbooks, as they come on will have a dilutive impact on ASPs, just by definition. We’re hoping to be able to manage margins such that the margins are accretive, as we talked to you guys before. But -- and then the other secular trend is the notebook displacing the desktop and as that happens, notebooks are getting cheaper and cheaper. They will always be a little bit more than desktops but they tend to approach it, so you’ve got those all playing together. I think that -- you know, I’m not going to give you an ASP forecast out of all of this but I think you need to think about how these dynamics come together.

The third thing would be servers. I do think that we are on the edge of a fairly strong build-out of server capacity both in enterprise and cloud over the next few years and we’re -- and Intel is particularly well-positioned to benefit from that. That will have an uplifting impact on ASP.

Glen Yeung - Citigroup

That’s helpful. Thanks.

Operator

Your next question comes from the line of Tim Luke with Barclays Capital.

Tim Luke - Barclays Capital

Thanks so much. Congratulations on your execution. Paul, just in terms of the -- well, maybe for Stacy, actually -- you just mentioned that you -- some of the revenue had come from the refill, so just to be clear, you feel now that your OEM and channel is now at a point where you will be having more seasonal lift rather than refill lift -- would that be correct? And it also looked like the chipsets outpaced the microprocessors -- does that sort of enhance your visibility to some extent for the calendar third quarter? How should we think about that?

Stacy J. Smith

I think the short answer to both of those questions is yes. You know, what we saw was a little more predictability and a little bit of -- in terms of the sales we saw in Q2. We also saw the supply chain doing a partial replenishment from the inventory that burned off and as Paul said, when we look at the inventory in the supply chain, it looks pretty appropriate for a supply chain that’s geared up for a seasonally stronger second half. So we don’t see anything that we would think is excess there.

That gives us some confidence that from our customer standpoint, they are gearing up for a seasonally up second half and then as you pointed out, the chipset volume that we saw in Q2 would be kind of appropriate in Q2 for a Q3 where they are expecting some unit growth. So all of those point to what we said a quarter ago, which is the expectation that the second half of this year is seasonally up from the first half.

Tim Luke - Barclays Capital

Do you, Stacy, as a follow-up have, or Paul, have any sense of how you perceive the introduction of Windows 7 impacting the market place in the second half of this year? In terms of seasonal pattern, I meant, Paul, rather than --

Paul S. Otellini

Yeah, I don’t know that I have an opinion on the consumer side of that one yet, Tim. You know, it really -- I heard Steve talk yesterday about they couldn’t predict exactly how it was going to play out on the consumer side.

In the enterprise side, I gave my opinion earlier, which is I think people will go into steep evaluations starting August/September, and get ready for buys next year. And that from a cycle standpoint is a fairly traditional cycle for when an OS is released to deployed in corporate.

Tim Luke - Barclays Capital

Thank you, guys.

Operator

Your next question comes from the line of John Pitzer with Credit Suisse.

John Pitzer - Credit Suisse

Good afternoon, guys. Congratulations on a good quarter. Paul, my first question, on the last conference call and then again at the analyst day, you guys were pretty emphatic about Atom being much more sort of new market expansive than cannibalistic. Granted it was off of a low base but when you look at the sequential growth in the quarter, do you still feel that way? And I guess when we think about longer term Atom as a percent of the client mix, what do you think that would be?

Paul S. Otellini

Well, our view hasn’t changed, John. It’s still a lot of the 65% jump that you saw in Atom revenues this quarter really was the fact that netbooks had been built ahead of the very rapid fourth quarter drop and they were living off of inventory in the second half of the fourth quarter and mostly through the first quarter. All those netbooks sold through from our customers and now they are starting to reorder and you are starting to see that pretty dramatic quarter on quarter swing reflected in our numbers. That’s why I used the word snap-back. I don’t think there was much -- I think the end user sales probably were much more constant over that period in terms of linear growth than the kind of big jump we saw this quarter in CPU shipments.

In terms of cannibalization, everything we’ve seen so far, both from a study standpoint and a purchase pattern standpoint and a buyer interview standpoint suggests that if there is any cannibalization, it’s at the low end of the notebook, the Celeron based notebooks that these are coming out of. And as we pointed out in the past, that’s a positive gross margin trade-off for Intel to make. And even at that, we’re talking about a total cannibalization that’s probably no more than 20%.

I think the usage models are really differentiating between notebooks and netbooks and that will be even more clear when the new ultra-thins are out there because now if you want a thin and light notebook, you don’t have to just pick a netbook. You can pick an affordable notebook that has more functionality.

So I think in the next six months, we’ll see greater end user differentiation between the two.

John Pitzer - Credit Suisse

And then Paul, as my follow-up, maybe a follow-up to Tim’s question, just around Windows 7 -- you said you don’t have a strong opinion around the consumer but I guess given how important the consumer is for Q3 growth, given that corporate client is still relatively weak, are you at all concerned that we could see a pause ahead of Windows 7 in the consumer market? Or what are you seeing around linearity in the September quarter versus sort of normal trends?

Paul S. Otellini

Well, you know, July and August are rather small anyway and the operating system is the last thing that’s loaded, so it’s very possible that this is all lining up for back-to-school, Labor Day kind of things. I don’t -- I’m not privy to the exact launch date of Win 7, so I can’t opine on that.

Traditionally though what has happened is that machines launched near the -- sold near the launch or prior to the launch have had some kind of coupon or upgrade capability and I suspect that will happen this cycle too, to be able to minimize the impact of any stall that might be out there.

John Pitzer - Credit Suisse

Great. Thanks, guys.

Operator

Your next question comes from the line of James Covello with Goldman Sachs.

James Covello - Goldman Sachs

Great. Good afternoon. Thanks so much for taking the question and congratulations on a very, very nice results.

The first question is about lead times -- have you seen any stretching of your lead times at all, especially as we got to the end of the quarter and you obviously saw better business, given Stacy’s comments about inventory, you know, wanting to be flat or up a little and wind up being down?

Paul S. Otellini

No, I mean, we got a little bit out of mix on some of the low-end chipsets kind of mid-quarter but that got corrected pretty quickly. And in microprocessors, really no -- if you want parts, we’ve got them.

James Covello - Goldman Sachs

Okay, and you’re not indicating any stretched lead times to your customers for the out quarter?

Paul S. Otellini

No.

James Covello - Goldman Sachs

Okay, great and then my follow-up would be, if I could, the time frame that you guys think is reasonable for us in Wall Street to expect a meaningful contribution to the P&L from embedded and/or handheld?

Paul S. Otellini

Well, embedded is already meaningfully contributing. We’ve -- I think we’ve described that as a large ongoing business, well in excess of $1 billion, and that’s just -- it’s on a nice growth rate and I don’t think I want to give any more granularity than that.

On the handheld, I think a lot of the -- you are seeing us make some progress in MID devices this year. The product that really is aimed at the sweet spot of the handhelds is the [Moore’s town] product, which is a 20-10 high volume product.

Stacy J. Smith

Jim, if I could just add on the embedded side, as Paul said it’s a business that’s well in excess of $1 billion, growing fast and I share some information at the investor meeting a couple of months back that the gross margin, the product margin within that business is actually beyond what we get in our core client business, so it’s a very profitable business. It’s on a nice growth clip and you look at something like the Wind River acquisition that’s really meant to accelerate our efforts there and will also have spillover effect into where we want to go on the handheld market [as well].

R. Kevin Sellers

All right, thanks, Jim.

Operator

Your next question comes from the line of David Wong with Wells Fargo.

David Wong - Wells Fargo

Thank you very much. Can you give us some feel for the puts and takes on Atom’s ASP? You talked about embedded but also Atom for desktops. And separately, you guys haven’t said this but we’ve seen items in the news about giving less of a discount to companies who use Atom in netbooks above 10-inches, so can you help us understand which things suppressed ASP, which things push up ASP, and on balance whether it rises up through the rest of this year?

Paul S. Otellini

I don’t think Atom ASP is going to be materially different over the course of the year, at either the processor or kit level. You know, there really are no changes. We’ve got some variance of the product coming in. We bring in a dual-core version for the desktop later this year and things like that but for the most -- and then we’re moving to more highly integrated versions in SOC, following that. All of that is aimed at meeting the existing price points with very cost-efficient and performance efficient products.

David Wong - Wells Fargo

Okay, thanks. And another quick one for Stacy -- Stacy, restructuring costs, do they continue for quite a long time? I mean, we’ve seen restructuring costs in every quarter. Do they keep going on going forward or do they begin to tail off at some point fairly soon?

Stacy J. Smith

Well, I think -- I guess it’s all relative. They are tailing off, David, you know, when we were just embarking on our efficiency program, you know, going through significant reductions in the employee base of the company, we were seeing restructuring charges that were running in the hundreds of millions of dollars.

What you see this quarter is restructuring charges, it’s all employee related, it’s the actions that we announced to you back in the first quarter which are some closures of some older generation factories and some smaller assembly test factories, that the carry-over that you are seeing in Q2 is going to be the continuation of some of those actions. You can see that Q2 -- or I’m sorry, Q3 is kind of half what Q2 was, and I’d expect it to stay at some level of restructuring cost but at a pretty low level when we get into the second half of the year.

David Wong - Wells Fargo

Great. Thanks very much.

Operator

Your next question comes from the line of Ross Seymore with Deutsche Bank.

Ross Seymore - Deutsche Bank

Thanks, guys. Stacy, a question on the gross margin side of things -- other than the 32-nanometer charges going away in the fourth quarter, are there any other one-time dynamics we should include in our models?

Stacy J. Smith

Yeah, let me just pontificate a bit on what I see are some of the headwinds and tailwinds on gross margins as we go into the fourth quarter. I’ll give you some insight on what I see and I’ll preface it by saying I’m not going to give a point estimate but I’ll give you some ideas of some of the relevant trends that I see.

So we talked about the reserve impact. I think that that should give us two to three points of gross margin tailwind from Q3 to Q4. When I think about start-up costs and excess capacity charges, I actually don’t think that they are going to be materially different in the fourth quarter than they are in the third, so I don’t think they are going to be either a headwind or a tailwind.

If you remember what we said on start-up costs at the investor meeting, we said that they would peak in the second quarter, come down in the third, and kind of flatten out in the fourth. That’s still what I expect and similarly with excess capacity charges, you know, a big number in Q1, cut dramatically in Q2, down a bit more in Q3 and then flattens out -- again, that’s still what I expect.

So when I kind of take those elements into account, I kind of think of my Q4 gross margin as being in the upper half of the normal range that I’ve articulated in the past. I’ve said between 50% and 60%. You know, I think that with the reserve good news, I’m likely to be in the top half of that when I get into the fourth quarter. Obviously it will be somewhat dependent on pricing and business levels and I’m not ready to put a forecast around those but you know, independent of those, I think I’m in that top half of that range.

Ross Seymore - Deutsche Bank

Great, and then I guess while we’re talking about ranges, it’s nice that you guys are actually giving a range but it’s a little bit bigger on the revenue line than we’ve had in years past at about $800 million. What would be the dynamics, other than just simply better or worse demand that would take you to the higher low end of the $800 million range in revenue?

Stacy J. Smith

Well, I think that -- I’ll talk to the forecast range and then maybe Paul wants to add on here. The -- you know, we didn’t provide a specific point estimate for revenue in Q1 and Q2. I think that was an indication of the volatility that we were seeing in in-demand levels as well as the volatility we were seeing in the inventory levels in the supply chain. As we start Q3, you know, we’ve seen order patterns stabilizing -- in fact, improving a little bit in the consumer segment and we’re seeing as partial refilling of the worldwide supply chain, the combination of that gives us more predictability but you can’t lose sight of the fact that there still is a lot of economic volatility out there. We still see a weak enterprise market, so we think the right answer is to provide the point estimate but with a wider range because I think there’s a wider range of potential outcomes in this Q3 than what we’d normally see.

Ross Seymore - Deutsche Bank

Thank you.

Operator

Your next question comes from the line of Stacey [Razgon] with Sanford Bernstein.

Stacey Razgon - Sanford C. Bernstein

Thanks for taking my question. A question for you on ASPs this quarter -- you said that ASPs, even excluding Atom, were still down but you had much higher growth of mobile than either of the desktops and you even spoke about strength in the server segment from Nehalem where the ASPs should be much higher. So I was wondering if you could help me understand why ASPs overall excluding those things would still be down from where they were in Q3? In particular, if you could maybe focus on the mainframe notebook side, that would be --

Paul S. Otellini

Sure. It’s a pretty simple answer -- it’s relative weakness in the enterprise segment of the market relative to the consumer. Enterprise tends to be a higher, more full-featured mix. That’s particularly true in notebooks. We predicted that for Q2 and that’s what we saw and as we look into Q3, the expectation is Q3 tends to be a more consumer led quarter, so we’re likely to see a little bit more of that mix towards the consumer, which gives us a little bit more of a downward pressure to ASP in the third quarter.

Stacey Razgon - Sanford C. Bernstein

How does this continue going forward as more and more of these new consumer platforms start to ramp?

Paul S. Otellini

Well, I think I tried to answer that before, which is I think that in general you are going to see a secular decrease in average selling prices and notebooks -- notebooks, not notebook chips, as notebooks just get cheaper, as Intel integrates more and more onto a single chip, particularly for the low-end, that allows us to maintain good margins, even as the price points come down. And you are just seeing that evolution happen bit by bit now.

Stacey Razgon - Sanford C. Bernstein

And I guess for my follow-up, if we can maybe focus a little bit on [inaudible] -- I was wondering if you could -- you used the word pontificate earlier but --

Paul S. Otellini

Stacy did.

Stacey Razgon - Sanford C. Bernstein

-- the potential for COV to maybe bring pricing in the stack down as you have -- and also looking at the opportunity even potentially for upselling with that, with --

Paul S. Otellini

Yeah, actually I see it as more of the latter than the former. We have ultra-low voltage versions of all of our mainstream brands -- of Celeron, of Pentium, and of Core. And those ULV versions sell at a premium to the non-ULV versions in each of the brand segments. So what we are trying to do here is get an up-sell inside of every brand segment for ultra-low voltage for the technology that I talked about and the form factors that enabled. And you’ve seen our customers have a variety of patterns of introduction around that. Some customers are focusing on the core brand ULV products. Some are focusing on Pentium or Celeron to be able to enable very different price points. In all cases though, those CPUs sell at a premium to their non-low voltage brothers that we are shipping into the marketplace at the same time.

Stacey Razgon - Sanford C. Bernstein

Even though the platforms themselves are cheaper than the typical form factors where you would see those?

Paul S. Otellini

Well, on a CPU per CPU into the same segment, if you will, performance segment, it’s higher because it takes -- it uses a higher yield effectiveness of our technology to build them. The package is a little more expensive. It uses a corner -- you know, it uses the higher performing parts of the process to be able to deliver the performance at low voltage.

R. Kevin Sellers

Thanks, Stacey.

Operator

Your next question comes from the line of Uche Orji with UBS.

Uche Orji - UBS

Thank you very much. Paul, can I just ask you about the dichotomy between Europe and the U.S., and North America in terms of the quarter revenue -- is there any insight you can give us as to what’s really happening in the end market of these two markets? I think I may be wrong, but this is probably the sharpest dichotomy I’ve seen in terms of growth between Europe and the U.S.

Paul S. Otellini

Let me try -- well first of all, the normal seasonal pattern for Europe in the second quarter would be down 15%. Europe was down a little over 9%, so it was not immune to the kind of surge we saw in other geographies but it was relative to other geographies, the only negative one. That’s why we didn’t point it out.

And my view is two-fold -- one, Europe is a big continent in the sense that it includes not just the Western European countries but also places like Russia and the Middle East, where you’ve got a mixture of economies that are recovering fast or slowly, depending on their sensitivity to say energy prices, for example. So the patterns we saw in Western Europe are slightly different than the patterns we saw in the former Soviet Union or the Middle East and Africa, point one.

Point two, in general, Europe went into this cycle from our perspective, from a technology sales perspective, a little later than the U.S. and I think they are coming out a little later than the U.S. And to first approximation, it looks like about a quarter, you know, three or four months difference right now.

Stacy J. Smith

If I could maybe add one thing -- you also have to keep in mind that a lot of the demand in Europe is satisfied from production that happens in Asia-Pacific and so what you saw in the prior quarter was Asia-Pacific was down much more than the rest of the geographies. That’s a function of this worldwide supply chain kind of re-optimizing inventory levels. What you see in this quarter is Asia-Pacific is stronger than the rest of the world -- again, that’s partially a function of that refilling of the inventory pipeline and then partially a function of some real strength we’re seeing in China. I think you have to keep in mind that length of supply chain to make Europe make sense as you look at the quarter by quarter changes.

Uche Orji - UBS

All right, that’s really helpful -- just a different question; NAND Flash, there wasn’t really much said about it this quarter. Any insight as to what contribution that may have had on the margin and also into the outlook, any insight as to how your product roadmap for NAND products are developing, that would be helpful.

Stacy J. Smith

Sure. You know, you have to first keep in mind that NAND is a relatively small portion of our overall business. I showed some of that at the investor meeting, and so we did see pricing better in Q2 than we’d seen in the prior quarter. And then as we said over the last six to nine months, our costs are coming down at a nice clip.

The combination of those two things gave us something less than a point of good news to the gross margin line in terms of NAND in Q2. It wasn’t at the same kind of level as what we saw with the CPU business but it certainly was positive.

As we go into the second half, I have fairly good insight into the fact that my costs keep coming down. I watched the pricing very carefully and I’d expect it to come down a bit and the question is just going to be how much as we get into the second half, but I think I can keep it gross margin neutral over the second half just based on cost control.

The second part of your question is you know, we also talked about moving into solid state drives and things like that and we made good progress in that. We’re getting good customer acceptance, some great industry recognition in terms of the quality of our solutions and we are in the ramp phase as we go into the second half of this year and into 2010.

Uche Orji - UBS

So should we be expecting more meaningful contribution in 2010?

Stacy J. Smith

You know, I think it remains a fairly small portion of the overall business but we are certainly committed to keep driving the kinds of levers or pushing the kinds of levers that we’ve been pushing to improve the financial performance of the business, so we’re committed to keep doing that.

Uche Orji - UBS

All right, great. Thank you very much.

Operator

Your next question comes from the line of Chris Danely with J.P. Morgan.

Chris Danely - J.P. Morgan

Thanks, guys. Stacy, could you give us a little more color on what the utilization rate should be tracking in the second half of the year and how much inventory or additional inventory you guys will be producing?

Stacy J. Smith

Probably not at the level of granularity that you want and it’s going to be from a shape standpoint, very consistent with what I showed in May at the investor meeting. You know, we took utilizations down to a record low in the first quarter -- in the second quarter, sorry, they get meaningfully better in the second quarter, they will get somewhat better again in the third quarter and then kind of flatten out. That’s pretty consistent with what we showed you.

I did indicate earlier on the call that we are going to keep a bit of 45-nanometer capacity in place. We want to wait to see some of the demand signals. It’s devastating for our business to get caught short. When we get into 2010, we’ll either fill that capacity or we’ll redirect that offset 32-nanometer investment and again, we talked about that. That’s the roll-forward effect of what we can do with one generation buying capacity and capital.

What was the second part of your question? Oh, the inventory levels -- I’m a little lower than I’d like right now. I’d like to put some inventory in place in Q3 but with the phenomenon that I talked about of the [inaudible] products that are being built prior to qualification that will end up being written off in the third quarter, my guess is that I’ll show net inventory actually down a little bit in Q3 and maybe I’ll get a bit more in place in Q4.

Chris Danely - J.P. Morgan

Got it. And then the second question, and it might be better for your [FP&A] guys but you know, you guys look at the Intel versus the PC tracking and so if we plug in normal seasonality for Intel in Q4, your revenue will be back up to the -- up 10% year over year, which is great. However, if we look at where the PC market is tracking, that revenue will be down about 10% or more year over year in Q4, so I guess -- you know, I mean, I hear you and that’s what I hear, that inventory is very low out there but how do you guys explain the discrepancy between processor sales and PC sales?

Paul S. Otellini

Well, I think the people who track the market tend to play off of our results to a large portion and you’ll see -- I think you’ll see -- you have seen the year-over-year numbers in terms of decline, projected declines of the industry, shrink. I mean, people were talking about 15%, 18% down in January for the year. Now they are talking about 10%, 5%, and some are even projecting much lower numbers than that, closer numbers than that.

So my sense is that the forecasting world is catching up to the reality of what’s being shipped today more than projecting where the world will really be.

Chris Danely - J.P. Morgan

Great, thanks. That’s very helpful.

Operator

Your next question comes from the line of Doug Freedman with Broadpoint.

Doug Freedman - Broadpoint

Thanks for taking my question, guys. One for you, Stacy, if you could talk and give us a little bit of an update on the China start-up costs. I know it’s looking out a little bit ways but any updates there on what we should expect early next year?

Stacy J. Smith

No, Doug, nothing beyond what I showed you six weeks or so ago at the investor meeting. You know, we are starting up a new site -- that’s an unusual phenomenon for us that will drive a little bit of increase to start-up costs. You know, I did say for Q4 I’d expect start-up costs to be relatively flat. A portion of that is going to be the early start-up costs associated with the China factory but for 2010, you know, I’m not currently thinking it’s different than what I showed you six weeks ago and we’ll watch that as we get into next year’s investor meeting.

Doug Freedman - Broadpoint

All right, and one for you, Paul, if you could talk a little bit about whether you feel like you have all the pieces needed now to go after more revenues in non-PC markets? You know, if I add them up, recently we’ve had deals with LG, with Cisco, with IBM, with Nokia, the Wind River deal -- do you now have everything that you need or should we consider your efforts here just starting? If you could tell us how we should think about that, that would be helpful.

Paul S. Otellini

Well, I don’t think we have critical mass yet. I mean, we have large ambitions in the non-PC space and a lot of the design wins that we either have or would like to have have not been announced. And in many of these areas, this is a long-term trend. So I think you see very good progress here, both on the customer side and also on the infrastructure side.

You know, when the companies were buying in the graphics area, for example, to be able to get ready for a robust software environment around Larabie and now the acquisition with Wind River for handsets and embedded -- all these are flushing out the ability to allow us to move even faster into these markets.

R. Kevin Sellers

Thanks, Doug. Christina, we’re going to take two more questions, if that’s okay.

Operator

Your next question comes from the line of John Barton with Cowen & Company.

John Barton - Cowen & Company

-- the topic of embedded, Paul, in the previous response you had talked about embedded being a $1 billion company. Obviously that’s things other than Atom. In your prepared statements when you are talking about Atom revenue, you said primarily driven by netbooks but also net tops and embedded. Could you give us a feel for how Atom is doing embedded, and maybe kind of weave within there how the relationship with PSMC is working?

Paul S. Otellini

Well, I did that at the analyst meeting. I’m trying to remember from then in terms of what I talked -- I think I talked about 1,200 new designs in Atom in embedded space, and out of that there were 120, 150 customers that were new to Intel as a result of that. So what we see is converting of our existing embedded customers to Atom-based designs and other newer generation of products. Then we also see new customers coming in but we are taking architectural share in embedded from power and to some extent, from MIPS, the higher end products that sell in those segments.

I think that continues as we share our system on chip roadmaps with embedded customers because that allows them to be able to do all of these solutions with high performance and one single product, one single chip product.

And to me, this is just a -- you know, we’ve been in embedded for 25 years and these are long design cycles but then the design cycles play out for a long time in terms of production and that’s why the business tends to give you a very nice gross margin profile.

John Barton - Cowen & Company

And then as my follow-up, if I could, you’ve made reference to the fact that the usage models are really starting to find themselves as it pertains to netbooks. Can you give us some insight as to what you are seeing in sales trends for netbooks, particularly as it pertains to developed economies, developing economies, et cetera?

Paul S. Otellini

They are still principally developed economies or tier one cities in emerging markets, in places like Shanghai or Beijing. I think that you will start seeing that spread into more emerging markets as the global economy recovers and system price points continue to come down. The primary usage model that we’ve studied in places where there is the highest buyer satisfaction is where they align around a principally Internet based model.

When people try to do 3D games on these things or try to run their office applications on them, they tend to think it’s a bit slow and that isn’t just the processor, it’s the entire architecture.

So I think you are seeing a model emerge that is a third usage category and that’s likely to be -- to have a higher contrast between those products and notebooks, as the ultra-thin products come to market.

John Barton - Cowen & Company

Thank you.

R. Kevin Sellers

Thanks, John. Christina, this will be our last question.

Operator

Your next question comes from the line of Gus Pritchard with Piper Jaffray.

Gus Pritchard - Piper Jaffray

First question is on the Atom, how much has the advent of the carrier and selling those through that channel helped the Atom sales in the second quarter and how do you see that playing out going forward?

Paul S. Otellini

It hasn’t had a -- I can’t use the word material here -- it’s not the driver at this point in terms of sales to date. We see a tremendous amount of interest from the carriers in conjunction with both OEM and ODMs to participate in this business. I think in 2010 that’s likely to be a large part of the business. You’ve seen some very interesting existent points of this. There was a Best Buy, Sprint netbook ad last week at $0.99 if you signed up for two years, I think it was. And you’ll start seeing more of that but I don’t think that’s the prime driver. I know it’s not the prime driver to date. You’ll start seeing more of that into the holiday season this year.

Gus Pritchard - Piper Jaffray

And then my follow-on question is given the fact that inventory up and down the food chain is pretty lean, you guided to sub-seasonal growth in Q3 and I was just wondering what’s the hesitation to your more normal seasonal growth?

Stacy J. Smith

Two comments to that -- first of all, keep in mind Q3, you typically see an inventory build in the seasonal patterns. And then secondly, it’s really just an indication of a continued expectation that the enterprise market will stay weak in Q3 and frankly, we expect that throughout the second half of this year. We’re not anticipating client sales in the enterprise to pick up this year.

Gus Pritchard - Piper Jaffray

So effectively, the build happened a little bit earlier in terms of seasonal builds in Q2?

Stacy J. Smith

Well, the expectation is there will be a bit more build in Q3 and anticipation of an even higher Q4. That’s kind of how seasonal patterns work but that’s in the seasonal comparison, so -- we normally see that.

Gus Pritchard - Piper Jaffray

Got it. All right, thank you.

R. Kevin Sellers

Thanks, Gus and thank everybody for joining our call today. As a reminder, our quiet period for the third quarter will begin at the close of business on Friday, August 28th. Our third quarter earnings conference call is scheduled for October 13, 2009. Thank you again and good night.

Operator

Thank you for your participation in today’s conference. This concludes the presentation. You may now disconnect. Have a great day.

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